Archive for September, 2008

A $700 billion bailout plan for Wall Street - the result of closed-door deal-making on Capitol Hill over the weekend - failed to muster enough support in the House of Representatives today, with a vote of 228-205 against the controversial measure. A total of 95 Democrats and 133 Republicans voted “no.”

Supporters of the plan fervently tried to get the opposition on board, keeping the vote open much longer than the standard 15-minute time frame. But even those efforts failed.

When news of the bill’s defeat became known, the response from the financial markets was swift. The Dow Jones Industrial Average plunged by more than 700 points at one point, with both the Nasdaq and the Standard & Poor’s 500 Index dropping nearly 7%. Tremors of panic were seen with regional banks, as well, with shares in National City falling 66% to their lowest since April 1982.

The legislation, titled the “Emergency Economic Stabilization Act,” would have given the federal government an immediate $250 billion to buy up troubled assets from investment banks and financial services companies as a way to shore up the ailing economy. The final version of the bill also included a cap on golden parachutes received by executives whose companies participated in the bailout program.

Supporters of the bailout package say they intend to bring the bill up for consideration again in the immediate future.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

One more bank has bitten the dust. In yet another deal orchestrated by the U.S. federal government, Wachovia Corp. will be bought by Citigroup for approximately $2.1 billion. According to a statement issued by the Federal Deposit Insurance Corporation (FDIC) on Sept. 29, Citigroup will absorb up to $42 billion in losses on Wachovia’s most risky mortgages, with the FDIC taking on any losses beyond that amount. In exchange, Citigroup will hand over $12 billion in preferred stock and warrants to the FDIC.

The government’s deal with Citigroup is similar in structure to the agreement that it put together in March, when the Federal Reserve provided financial backing to JPMorgan Chase for the takeover of the 85-year-old investment firm of Bear Stearns.

For months, Wachovia’s financial picture has been in a downward spiral, the root of which was connected to its 2006 purchase of Golden West Financial. California-based Golden West specialized in optional adjustable-rate mortgages (ARMs) - mortgages that offered low payments at the beginning of a borrower’s home loan, followed by much higher payments later on.

With its portfolio burdened from massive losses on these optional ARMs, Wachovia’s stock plummeted more than 80% in value this year.

The final outcome for Wachovia illustrates the increasing toll that subprime problems have levied on the nation’s banking industry. In July, there was the collapse of IndyMac Bank. And, just last week, Washington Mutual - the country’s largest savings and loan – had been teetering on the brink of bankruptcy before its seizure by the government and subsequent sale to JPMorgan Chase.

In order to buy Wachovia, Citigroup must sell $10 billion in common stock, as well as slash its quarterly dividend - the second time it has done so this year - in half to 16 cents.

Once the deal with Citigroup has been finalized, Wachovia will remain a public company, with two main divisions: its brokerage arm, Wachovia Securities, and its investment management business, Evergreen Asset Management.

Interestingly, it was just two years ago that the Federal Reserve had imposed a ban on Citigroup from making any major acquisitions because of the bank’s inadequate risk-management controls and regulatory problems. Earlier this summer, Citigroup agreed to buy back some $7.3 billion in illiquid auction-rate securities from individual investors, charities and businesses, as well as pay a hefty fine of $100 million to settle potential fraud charges by New York Attorney General Andrew Cuomo over auction-rate securities sales and destruction of subpoenaed documents.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

It took nearly five days, a phone call to billionaire investor Warren Buffett and unexpected concessions from Republicans and Democrats alike, but consensus was finally reached Sunday, Sept. 28 on landmark legislation designed to save Wall Street from a total financial break-down. The long-awaited bailout plan, which goes to the House floor on Sept. 29 for a vote, followed a weekend of late-night sessions and seemingly endless in-fighting between both parties and the Bush administration over specific components contained in the historic rescue plan.

The end result is the “Emergency Economic Stabilization Act of 2008” - a $700 billion taxpayer-funded bill that will be remembered as the largest financial bailout in history, as well as one of the most dramatic interventions enacted on the part of the U.S. federal government since the Great Depression.

Highlights of the new proposal - which is still considered in draft form - include the following:

Amount of money: Treasury Secretary Henry Paulson initially requested an up-front sum of $700 billion to allow the government to buy up bad loans from Wall Street investment banks and other financial services firms. The new bill will provide an immediate $250 billion, with the remaining money given to the federal government in installments.

The government also will receive a stake in any company that participates in the bailout program under the new proposal, with the intent for taxpayers to potentially benefit if those companies prosper in the future.

Accountability: Paulson’s initial bailout plan essentially gave the government carte blanche in terms of administering the bailout program. Now, however, an independent oversight board will be established, with members to include Democratic and Republican lawmakers and a special inspector general. Any transactions that the board takes in regard to the bailout funds will be made known to the public.

Executive compensation: The new bill puts strict pay limits on “golden parachutes” for executives whose firms seek help through the bailout. Certain tax breaks for companies also will be removed if they benefit from the bailout. In addition, the bill requires that unearned bonuses for executives be returned.

Homeownership preservation: The new bill requires the U.S. Treasury to modify troubled loans wherever possible in order to help families keep their homes. The bill also directs other federal agencies to modify loans that they own or control.

Number of pages in bailout proposal: The first proposal was a mere three pages in length. The new version spans a total of 106 pages.

In announcing the agreed-to bailout plan at a 5 p.m. EST press conference on Sunday, Senate Banking Committee Chairman Chris Dodd called the occasion a “sad day,” adding that the impetus for the legislation “wasn’t a phenomenon or an act of God, but rather the result of excesses and irresponsible and reckless behavior on the part of Wall Street.”

The rescue bill now heads to House of Representatives on Monday morning, with the Senate to vote on it by Oct. 1. President George W. Bush is expected to sign the bill into law shortly thereafter.“

Emergency Economic Stabilization Act of 2008” can be read in its entirety at: http://www.house.gov/apps/list/press/financialsvcs_dem/press092808.shtml

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Alan Fishman’s rein as CEO of Washington Mutual - a position he inherited on Sept. 8, along with a $7.5 million signing bonus and a $1 million salary - was short lived. Late Thursday evening, Sept. 25, federal regulators seized the nation’s largest savings and loan and quickly orchestrated a deal to sell the bulk of the troubled bank’s assets to JPMorgan Chase for $1.9 billion. It is the biggest bank failure ever in United States history and the 13th bank failure so far this year.

WaMu’s descent this year has been swift. The Seattle-based institution was a major originator of subprime and other risky residential mortgages. Of the $182 billion in single-family mortgages that WaMu had on its books as of June 30, nearly $53 billion were optional adjustable-rate mortgage (ARMs) - a flashy and potentially dangerous loan option that allows borrowers to pay less in the beginning of their mortgage followed by payments that can increase dramatically if interest rates go up during the loan’s tenure. In addition to the ARMs, nearly $17 billion of WaMu’s loans were subprime mortgages.

After becoming increasingly burdened from massive mortgage and credit card losses, WaMu’s shares lost nearly 90% of their value this year. On Sept. 8, Washington Mutual fired its CEO Kerry Killinger, replacing him with Fishman. By June 30, following credit rating downgrades to junk status, the bank had posted $6.1 billion in losses.

In taking over Washington Mutual, JPMorgan will pay the government $1.9 billion, and assume WaMu’s loan portfolio of $307 billion in assets. In total, JPMorgan is expected to write down approximately $31 billion of bad loans and raise some $8 billion in new capital.

As for shareholders and some bondholders, the deal means they will be wiped out. JPMorgan will not acquire any of WaMu’s liabilities nor claims by shareholders and senior debt and subordinated bond holders. WaMu’s customers’ deposits will be secure, however, according to federal regulators.

WaMu’s final curtain call and 119-year existence as an independent company came much like the scene depicted in the 1946 film, It’s a Wonderful Life, in which a run on the bank nearly forced the collapse of the fictional Building & Loan. In the end, of course, the Building & Loan survives. Sadly for Washington Mutual, real life was not so kind. In the past 10 days, depositors had withdrawn nearly $17 billion of their money, signaling a potential collapse that would have been devastating on the Federal Deposit Insurance Corp.’s insurance fund.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The historic bankruptcy filing of Lehman Brothers is likely to have repercussions for months, even years to come. And no one knows this better than investors who own Lehman Brothers bonds. In just the short time since the nation’s fourth-largest investment firm filed for bankruptcy protection, the value of its bonds has plummeted, with some analysts predicting bondholders may be facing losses of $110 billion when all is said and done.

Lehman’s bankruptcy filing means its assets will be sold, with the proceeds distributed to lenders and bondholders. Anything left over then goes to preferred shareholders, followed by common stock shareholders.

Things are not looking good for Lehman bondholders, however. As reported Sept. 22 in the Financial Times, Lehman bonds were prevalent among pension funds and mutual funds. That means any losses will have a significant impact on untold numbers of ordinary individuals.

Making matters even worse for bond investors is the potential of additional losses on Lehman’s derivatives positions, which are still being unwound.

Typically, when a company declares bankruptcy, senior debt holders usually are first in line to collect their claims. Prior to its bankruptcy filing, Lehman had $110 billion of unsecured senior bonds that were valued at approximately 95 cents on the dollar. Now they are trading at about 20 cents to the dollar.

Subordinated notes, which are among the last to paid and of which Lehman holds more than $17 billion worth - were trading for as little as 3.5 cents on the dollar.

Lehman Brothers was forced into bankruptcy on Sept. 15, following massive losses on mortgage-backed securities and insufficient capital reserves. In total, the company lost 94% of its market value in 2008. At the time of its bankruptcy, Lehman listed $631 billion of debt, including $110.69 billion in unsecured debt and $17.6 billion in unsecured, subordinated obligations.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Former Jefferson County Commissioner Mary Buckelew has pleaded guilty to obstruction of justice as part of a federal corruption investigation into bond sales used to finance the county’s controversial sewer system. When Buckelew initially was questioned by a grand jury several months ago on whether she received any payments from a Montgomery investment banker involved in the county’s sewer bond deals, she denied any wrongdoing.

In reality, however, prosecutors showed that Buckelew accepted numerous gifts - including some $4,000 worth of designer shoes and purses, as well as a $1,400 spa treatment - from an investment banker whose firm later collected millions of dollars in fees and commissions related to the county’s bond financing deals.

In pleading guilty to the charge of obstruction of justice, Buckelew could face up to 20 years in prison and fines of $250,000.

Buckelew isn’t the first Jefferson County commissioner to wind up in a federal courthouse. On Sept. 19, 2007, former Jefferson County Commissioner Chris McNair was sentenced to 60 months in prison on charges of conspiracy and taking bribes from sewer contractors. In addition, McNair was ordered to pay restitution to Jefferson County in the amount of $851,927.

Another former commissioner, Gary White, also was arrested on federal bribery charges for his alleged influence in the county’s $3.2 billion sewer work. White was convicted once and is now awaiting his second trial on charges that he took at least $20,000 from sewer contractors.

In total, 22 people have been convicted in Jefferson County’s ongoing sewer project scandal, including contractors, engineers and now three former county commissioners.

Jefferson County’s problems first began in 2002, when county commissioners sought the advice of JP Morgan Chase and other banks to finance a massive upgrade to the county’s sewer system, which was pumping raw and partially treated sewage into nearby streams. The county then borrowed money for the sewer project via the bond market in a series of complex transactions called interest-rate swaps. When the mortgage crisis began to unfold and banks subsequently tightened their lending, interest rates on the sewer debt skyrocketed out of control.

Meanwhile, upon hearing the news of Buckelew’s plea deal, Birmingham Mayor Larry Langford - who once resided on the Jefferson County Board of Commissioners at the time the sewer plans were first put together and who also is the target of an investigation by the Securities and Exchange Commission (SEC) for his connection in the bond swap transactions - offered his support for the commissioner, describing her as “an exceptionally fine person,” according to a Sept. 23 article in The Birmingham News.

The citizens of Jefferson County may have a different opinion. Because of the corrupt actions of their elected officials and Wall Street banks, water rates have gone up more than 350%, with the average customer now paying about $65 a month. On top of that, Jefferson County still cannot meet its payment obligations for the overpriced sewer work, meaning it is looking at the biggest municipal bankruptcy in U.S. history.

To read Buckelew’s plea agreement in its entirety, go to http://blog.al.com/spotnews/2008/09/buckelewplea.pdf.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

U.S. Treasury Secretary Henry Paulson is engaged in the fight of his life on Capitol Hill, as he tries to gain swift approval on the federal government’s $700 billion bailout plan for Wall Street. So far, the response from Democrats and Republicans has been lukewarm at best.

Here are a few reasons why:

1. The money behind the bailout is a band-aid solution.

Today it’s $700 billion, tomorrow who knows what the price will be. No one can predict if $700 billion is enough to bring stability back to the financial market. Unless Wall Street institutes greater checks and balances and improves its risk-management practices, investors’ confidence in the markets will never be fully restored.

Even more important, the historic bailout contains no oversight conditions on whom or what will be watching the federal government when it uses $700 billion of taxpayer money to buy distressed subprime loans and other toxic assets from various financial institutions. Instead, as the proposal currently reads, Paulson has unlimited power to decide how the $700 billion will be spent and on what.

Specifically, the bailout proposal states: “Decisions by the secretary pursuant to the authority of this act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

2. The plan smacks of ‘the good old boys’ mentality.

Henry Paulson is perhaps Wall Street’s most revered alumni. Before becoming U.S. Treasury Secretary, Paulson served as chairman and chief executive officer of Goldman Sachs. Paulson’s own past statements affirm his allegiance to his former stomping ground, and suggest that his current recommendations regarding the bailout might be based on the adverse impact the markets are having on his Wall Street buddies.

A few months ago, Paulson was quoted as saying that those who “gambled in real estate are nothing more than speculators.” He went on to say that, “while some in Washington are proposing big interventions, most of the proposals I’ve seen would do more harm than good.”

A short time later, Paulson told MSNBC that the unusually high number of home foreclosures was not preventable and that there is very “little that public policy makers can, or should, do to compensate for untenable financial decisions.”

3. Paulson’s past assessments - as well as those of Federal Reserve Chairman Ben Bernanke - of market conditions demonstrate serious errors in judgment.

• On March 28, 2007, Bernanke tells Congress that he believes the problem in subprime lending “is likely contained.”

• On April 20, 2007, Paulson says that he believes the housing market downturn has been reached or is nearly there.

• On July 26, 2007, Paulson says that the meltdown in the subprime mortgage market “doesn’t pose any threat to the overall economy.”

• On August 16, 2007, Paulson states that the “turmoil in the financial markets will “extract a penalty” on U.S growth, yet the economy looks strong enough to weather problems without falling into a recession”.

• On May 7, 2008, the Wall Street Journal quotes Paulson as saying “the credit crisis is waning” and that “the worst is likely behind us.”

4. The $700 billion taxpayer-funded plan lacks accountability and transparency.

The bailout plan is aimed at saving Wall Street - the same institutions and individuals responsible for getting us into this mess to begin with. Poor lending decisions, mismanagement, lack of transparency, corporate greed - all have contributed to the financial crisis engulfing the country today. Yet, Paulson wants to reward the perpetrators behind the crisis by putting taxpayers’ money on the line.

Where’s the bailout for homeowners? For small businesses? For the automobile industry? Each of these segments of commerce plays an important role in the day-to-day life of Main Street. Says Alan Meltzer, a former economic advisor to the late President Ronald Reagan, on the bailout plan: “This is a scare tactic to try to do something that is in the private, but not the public, interest.”

5. A weaker dollar could result from the bailout plan.

In early September, the U.S. dollar had rallied to a one-year high against the world’s currencies. Following the turmoil on Wall Street, however, it slowly began to fall. The bailout plan, which will push American debt in the $11.3 trillion range, is likely to increase fears about America’s fiscal health, sending the value of the dollar down even further.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Four of the firms at the heart of the nation’s growing financial crisis - Fannie Mae, Freddie Mac, American International Group (AIG) and Lehman Brothers - are now the subject of an investigation by the Federal Bureau of Investigation (F.B.I.) for potentially committing acts of fraud. The investigation is addition to a number of other probes being conducted by the F.B.I. in connection with the collapse of the subprime mortgage market.

Few details have been released regarding the F.B.I.’s investigation into Fannie, Freddie, Lehman and AIG, but reportedly the focus is on whether executives at those companies deliberately misled the financial markets about the health of their respective businesses.

Earlier in the month, Lehman’s chief executive officer, Richard Fuld, and AIG CEO Robert Willumstad received notice to testify before the U.S. House Oversight and Government Reform Committee in early October over the events leading up to the bankruptcy filing by Lehman Brothers and the government bailout of AIG.

Meanwhile, U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke remain embroiled in a battle with lawmakers over the government’s $700 billion emergency rescue plan for the nation’s ailing financial system. In the second day of answering questions on Capitol Hill, both men continued to meet resistance to the bail-out plan, which would give the federal government the green light to buy up billions of dollars in subprime-related debt from financial institutions.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Comparing the country’s financial crisis to an “economic pearl harbor,” billionaire investor Warren Buffet is backing U.S. Treasury Secretary Henry Paulson’s $700 billion proposal to bail out Wall Street and rid financial institutions of toxic mortgage-related debt.

Buffet also is buying a $5 billion stake in Goldman Sachs, a company in which Paulson - who reportedly is worth some $700 million - served as chairman and chief executive officer until taking his federal post in 2006.

On Tuesday, Paulson began another day of intense grilling by Senate Banking Committee members, as he fervently tried to sell them on his bail-out plan for the nation’s wrecked financial system. His proposal potentially could cost every man, woman and child in the United States $2,300, according to Reuters.

As for Buffett’s announcement to put $5 billion into Goldman Sachs, the news lifted the company’s shares nearly 7%. Over the past year, shares have fallen more than 40% in value.

Buffett’s cash infusion into Goldman entails his investment company, Berkshire Hathaway, buying $5 billion worth of perpetual preferred stock via a private offering. Buffett will then receive a 10% dividend, plus warrants to purchase $5 billion of common stock at a strike price of $115 a share.

Meanwhile, angry protestors are continuing to march in front of the New York Federal Reserve this week, with banners proclaiming: “Bail out Main Street, not just Wall Street.”

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The Great Wall Street Swindle: The Canada ConnectionWith Canada’s national election set for Oct. 14, the cross-border implications of the U.S. subprime debacle are taking stage, as financial institutions there post record losses this year related to subprime mortgage debt in the United States. Now, with those losses totaling in the billions of dollars - and potentially could become even higher - Canadian investors are crying foul, claiming they were blatantly lied to by Canadian banks and brokers about investments exposed to U.S. subprime loans.

Before the 1980s, commercial banks were required to have reserves of funds on hand in order to make a mortgage. When those regulatory requirements were lifted, the banks then “sold” the mortgage to a Wall Street investment bank, which turned around and sold stock in that mortgage to investors - i.e. a mortgage-backed securities. Soon, trillions of dollars had been poured into these securities. Over time, as Wall Street’s appetite for mortgage-backed securities grew, they needed more people to buy homes.

Enter subprime mortgages. Enticed by lenders’ NINJ loans - no income, no job - potential home buyers eagerly jumped on board. Only later, when the interest rates on those loans skyrocketed after a couple of years did homeowners realize they were in over their head. As a result, 3 to 4 million people will lose their homes because of subprime loans.

Now, what happens to this toxic debt - the pools of funds filled with these mortgage- backed securities?

On Sept. 14, Canada’s CBC Sunday news show provided the answer in an in-depth documentary titled The Great Wall Street Swindle. Among other things, the piece drew obvious parallels between the greed, corruption and mismanagement of many investment banks in the United States and the trickery and deception displayed by a number of Canadian banks and brokerages that sold nearly $35 billion worth of something called asset-backed commercial paper, or ABCP, to unsuspecting Canadian investors.

Steven Caruso, partner in the New York City office of Maddox Hargett & Caruso, P.C., compares the circumstances leading to the meltdown of Canada’s investment community to much like what occurred in the case of former Bears Stearns executives Ralph Cioffi and Matthew Tannin. The two men were the masterminds behind the creation and eventual collapse of two hedge funds loaded with toxic subprime mortgages. When the funds headed down the tube, Cioffi and Tannin simultaneously sang their virtues to investors.

“It was very similar to a pyramid scene,” said Caruso on CBC Sunday. “I don’t want to say they were cooking the books, it was more like grilling the books.”

In the case of Canada, banks apparently did some cooking of their own with asset-backed commercial paper. ABCP is an investment structure based on commercial mortgages that are bundled together and sold to banks. ABCP was supposed to be a safe, short-term investment, much like cash in the bank, according to Canadian banks and brokers. Better still, investors were told that ABCP was guaranteed by Canada’s big banks, an insurance policy of sorts.

Investors soon learned the reality of their brokers’ promises, however, when they began to hear about the burst of the U.S. housing bubble and later discovered their own investments in ABCP was connected to those American subprime mortgages.

By Aug. 27, the gig was up, and investors stopped buying ABCP altogether. As in what happened when the auction-rate securities market seized up in February 2008, Canada’s $34 billion ABCP market froze. Investors had no way of accessing their cash.

Much of the $34 billion in unredeemable ABCP is held by Canadian pension plans. Smaller amounts are held by companies and individuals.

As for the banks’ guarantee to honor investors’ ABCP investments? Most refused, reported the CBC show.

Iris Pierce, 65, is one of individuals who, on the advice of her Toronto brokerage firm, put her life savings in ABCP. Formerly retired, she is now forced to return to the workforce.

“I have no where to turn,” she says.

Meanwhile, Canadian banks, including the Bank of Nova Scotia, are being accused by retail and institutional investors alike of dumping their own inventory in asset-backed commercial paper while continuing to promote the investment to clients.

Sound familiar?

After months of wrangling, the Pan-Canadian Investors Committee - a group overseeing a controversial restructuring plan to rescue the $34 billion market of frozen asset-backed commercial paper - was given the go ahead to move forth with their proposal. Several Canadian activists groups had tried to block the plan because it will all but remove investors’ ability to sue those who were involved in selling them the debt securities, except in cases of fraud. And apparently there are many of those cases.

The plan itself will convert the insolvent 30- to 90-day ABCP debt into new notes maturing within nine years for some investors. That means those investors, who initially thought their investment was short term, will be able to retrieve their cash in nine years.

The bottom line: In the end, whether Wall Street or Canada, the corrupt actions taken by those in charge puts Main Street on the line to pay the ultimate price.

To view the CBC’s show, The Great Wall Street Swindle, in its entirety, target="_blank">Watch CBC Interview with Steven Caruso

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.